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Chapter 6
Facing the Long Wave: the Recession
and the Italian Labour MarketRiccardo Gatto* and Leonello Tronti**
1. THE RECESSION AND THE LABOUR MARKET
The global recession appears to have had less severe effects on public nances inItaly than in other European countries. In 2008 and 2009 the budget decit averaged4.0% of GDP, against 5.7% in France, 7.8% in Spain, 9.6% in the United Kingdomand 10.2% in Ireland. However, the impact on economic growth has been fargreater (Figure 1). In the same two-year period, Italian GDP fell by 6.3%, nearlytwice the 3.6% decline in the euro area. In addition, prices continued to rise fasterin Italy than in the rest of Europe (2.2% annually against 1.8% for the euro area).
However, considering the sharp fall in output, the impact of the recession onthe labour market was relatively modest. Total employment continued to growthrough the rst quarter of 2008, even though GDP had already begun to contract(Figure 2). Employment growth peaked in that quarter at 1.9% over the samequarter of 2007. Job growth then slowed, giving way to a contraction in the fourthquarter. Year on year, the number of persons employed actually grew appreciablyin 2008, against a 1% fall in GDP. Then, in 2009, employment fell sharply, with339,000 fewer people in work, but again the related job loss (1.6%) was much
Roger Blanpain, William Bromwich, Olga Rymkevich & Iacopo Senatori (eds),Labour Markets, Industrial Relations and Human Resources Management, pp. 99115. 2012 Kluwer Law International BV, The Netherlands.
* ISTAT, Rome, Italy.** Roma Tre University, Italy.
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Fig
ure1.
Theimpactofthe
internationalcrisisonG
DPinselectedcountries
(Pe
rcentagechanges2009/2007)
7.1
1.7
1.8
2.0
2
.4
2.6
2.8
3.6
3.7
5.1
5.5
5.6
6.3
6.4
3.7
2.6
11.1
0.6
1.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Ireland
Finland
Japan
Italy
Denmark
Sweden
UnitedKingdom
EU(27countries)
Germany
Euroarea(16countries)
Spain
UnitedStates
Portugal
France
Netherlands
Belgium
Austria
Greece
Norway
Sou
rce:Eurostat
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Fi
gure2.
Italy:Employme
ntandunemployment
I/2006-III/2010
2,200
2,100
2,000
1,900
1,800
1,700
1,600
1,500
1,400
1,300
Unemployment(000)
Employment(000)2
3,600
2
3,500
2
3,400
2
3,300
2
3,200
2
3,100
2
3,000
2
2,900
2
2,800
2
2,700
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
2006
2007
2008
2009
2010
Employment
Unemp
loyment
S
ource:ISTAT,LabourForceSu
rvey
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less than the huge fall in output (5.1%). Firms made ample use of income supportprogrammes, and the number of hours of short-time working soared.
The hardest hit sector was manufacturing, where the impact of the decline
in exports was strongest. The fall was nationwide, about half of it occurring inthe North. In the service sector, by contrast, while self-employment decreasedsignicantly, there was a marginal increase in wage employment in northernand central Italy. Overall, job losses were relatively limited in central Italy andsubstantial in the North, and especially in the South. The drop in employment wasparticularly steep for men, while job losses among women were less pronounced,though still signicant in relative terms. The self-employed (craftsmen and smallbusinessmen in services and manufacturing) and the weakest segments of thelabour force (xed-term employees and freelancers) were the hardest hit, while
core staff workers were less affected.The pattern for unemployment has essentially been the mirror image ofemployment, though with signicant differences in timing (Figure 2). The numberof job seekers reached a low of 1.5 million in the second quarter of 2007 and thenrose steadily, as the pace of new job creation slowed. Between the second quarterof 2007 and the same quarter of 2010, the number of job seekers rose by 614,000,while between the employment peak in the rst quarter of 2008 and the thirdquarter of 2010, the number of persons in work fell in a similar way, by 607,000.Overall, the labour force remained relatively stable, albeit with some cyclicaladjustment and a substantial shift from employment to unemployment. Most of
the additional unemployment concerned men, though it was signicant amongwomen as well. Job seekers were concentrated in the North and among thosemade redundant. There was a much less pronounced increase in unemploymentin central Italy and especially in the South. The average unemployment rate rosefrom 6.7% in 2008 to 7.8% in 2009, reaching 8.4% in the rst half of 2010. Theincrease was particularly sharp among young people aged 15-24, and was greatestamong young women in the South.
The impact of the recession on unemployment was far less severe in Italy thanin many other countries. Figure 3 shows that for every percentage point of GDP lost,
the unemployment rate grew only 0.3 points in Italy, against 0.5 in United Kingdomand France, 0.7 in Ireland and 1.2 in Greece. Had the Italian unemployment ratereacted to the decline in GDP in the same way as the average of the euro area, itsincrease would have been 3.3 points and not 1.7. The reason for this less severeimpact may be traced to both institutional factors and behaviours of businessesand workers. Employers made use of subsidised short-time working schemes ona large scale, together with a certain amount of labour hoarding, whereas workersresponded with discouragement and inactivity.
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Figur
e3.
Howmuchdidtheu
nemploymentraterespo
ndtothefallinGDP?
Selectedcountries,
years
2008-2009(Elasticityinpercentagepointsoftheu
nemploymentratetoGD
P)
Spain
UnitedStates
Greece
Norway
Ireland
Portugal
Euroarea(16countries)
EU(27countries)
France
UnitedKingdom
Sweden
Denmark
Italy
Austria
Belgium
Poland
Japan
Finland
Netherlands
Germany
3.5
1.8
1.2
1.0
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.2
0.5
0.5
0.5
0.4
0
.2
0.2
0.2
0.2
0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Source:Eurostat
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2. SHORT-TIME WORKING AND LABOUR HOARDING
An important aspect to consider in assessing the impact of the recession on unem-
ployment is labour hoarding, i.e. the preservation of the employment relationshipduring a recession by employers who reckon the cost of dismissal and subsequentrehiring is greater than that of keeping the worker on. A choice of this kind is allthe more likely in the case of skilled workers and those for whom the employerhas made a substantial training investment. Labour hoarding is certainly a formof labour underutilization rather than unemployment, as the worker retains theirjob, even if working hours are reduced, even to zero hours per week. For workers,however, the experience of labour hoarding can be similar to unemployment or,at least, a clear signal of a strong increase in the probability of losing their job.
This explains why some analysts would like labour hoarding to be included in theunemployment rate or, at least, in some other ofcial measure of workers distress.Since 1945, Italy has had a public incentive for labour hoarding in the form of
a social insurance programme (the Cassa integrazione guadagni or wage guaranteefund), providing short-time working benets, and other European countries haveintroduced similar schemes.1 This programme sustains rms in economic dif-culty or undergoing restructuring, maintaining employees on reduced workingtime or even on zero hours, and providing income support. It thus makes it moreadvantageous for the employer to retain staff during a recession and, at the sametime, gives workers greater job and income stability, softening the social and
economic repercussions of recessions and mitigating potential industrial conict.In recent years, and especially with the onset of recession, the Italian Governmenthas extended the range of eligible beneciaries, as well as the term of benets, bymeans of exemptions for workers lacking national insurance contributions. Thishas certainly eased the economic and psychological impact of recession for thebeneciaries, but at the same time it has meant reduced utilization of the labourcapacity of these individuals.
In 2009, the hours of unemployment funded by the programme can be esti-mated to be equivalent to 300,000 full-time, year-round workers, some 210,000
more than in 2008. For 2010, the estimate2
is about 380,000. The Labour ForceSurvey provides a further estimate of workers on the programme (those on thezero-hours regime), reported out of work for the whole reference week. Thesewere 58,000 in 2008, 211,000 in 2009, and 182,000 on average for the rst threequarters of 2010.
Not all rms are eligible for income support during short-time working, evenwith the new exemptions, and not all the reduced use of labour is supported by
1. For a comparative analysis of programmes for labour redundancy in seven European countriesfrom both the legal and the economic standpoint, see Carabelli and Tronti (1999).
2. The estimate corrects the number of hours of short-time working compensation authorizedto rms, provided by the Social Security Institute (INPS), by means of a proxy of the ratiobetween hours authorized and hours actually paid to beneciaries.
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safety net measures. We can estimate the amount of labour hoarding outside theshort-time working compensation programme by means of the Wharton method,3assuming that interpolation between the cyclical peaks in productivity gives a
reliable measure of the labour utilization frontier, so that underemployment canbe estimated as the gap between that frontier and current productivity. By thismethod, whereas this non-supported labour hoarding was equivalent to some140,000 workers in 2007, in 2008 it rose to 370,000 and in 2009, due to a steadydecline in labour productivity, peaked at 960,000 (Figure 4). As productivityrecovered, in the rst three quarters of 2010, it fell back rapidly, and the gurefor the third quarter was 210,000.
3. DISCOURAGED WORKERS
Another important matter to be considered is the phenomenon of discouragedworkers, or inactive persons who nevertheless show some interest in the labourmarket. The labour force survey gathers information on discouraged workers:they are identied, among the inactive population, as those who state that they wantto work and would be immediately available to do so. This aggregate thereforerepresents total available labour. As a rule, these persons are not actively seekingwork because they do not believe the market gives them any chance of ndinga job. Surprisingly, in times of recession, this group tends to contract, because
the perception of higher unemployment leads them to rule out all prospects ofemployment.4
The data on the present recession conrm this. The number of discouragedworkers decreased by 13.3%, between 2008 Q2 and 2009 Q2, from 1,254,000 to1,465,000;5 then, in the second quarter of 2010 it started to grow again (by 5.5%)together with a slight increase in employment. Discouragement is more commonamong unemployed women about two-thirds of the total although over thethree years the gap between the sexes narrowed. Although accounting for themajority of discouraged workers, the South reported a modest decline. Only one-
seventh of the discouraged workers are resident in Central Italy, but their numbersdeclined more sharply over the period. The smallest change was in the Northeast,where discouragement is not widespread. In Figure 1 the dynamic of the numberof discouraged persons is analysed by sex and region. Although in the presenceof considerable variability, for all the series the rst phase is characterised by anincrease, from the rst quarter of 2007 until the third quarter of 2008; followed
3. For a critical presentation, see Taylor (1970).
4. The return to inactivity, however, is the dual behaviour of the attraction mechanism, outlinedin the 1960s by Tella (1964), for which the empirical evidence shows a strong correlation tothe employment cycle.
5. All the data from the ISTAT labour force survey in this article refer exclusively to the working-age population (15-64).
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Figure4.
Italy:Non-subsid
isedlabourhoardingI
/2007-III/2010
(Th
ousandfull-timeequival
ents)
1,400
1,200
1,000
800
600
400
200
0
2
5,500
2
5,000
2
4,500
2
4,000
2
3,500
2
3,000
2007
2008
2009
2010
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
Labourhoarding(non
subsidised)(r.h.scale)
Actualemployment(l.h.scale)
Employmentatfullca
pacityutilisation
(l.h.scale)
Sou
rce:AuthorscalculationonIST
ATdata(Ofceofnationalstat
istics)
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by a fast decreasing phase until the third quarter of 2009 and nally a period ofoscillation and relative stability.
4. LABOUR UNDERUTILIZATION
In addition to unemployed workers, if we count as underutilized labour thoseout of work but receiving short-time benets, plus discouraged workers, thenthe number of underutilized persons in the third quarter of 2007 was more thantwice the unemployment rate. As the recession advances, however, the numberof discouraged workers declines, while the number of zero-hours workers onshort-time working increases, with an increase of total labour underutilization from
2,932,000 in the rst quarter of 2007 to 3,291,000 in the third quarter of 2010.This broader look at the impact on the labour market of the recession enables usto construct an underutilization rate including short-time working plus discouragedand unemployed workers as the numerator, and labour force plus the discouragedas the denominator. This is an indicator similar to the unemployment rate, buttakes into account the broader category of available labour underutilization thuswidening the concept of the labour force. This measure is obviously noticeablyhigher than the ofcial unemployment rate6 (Figure 5). It has been above 11%since the third quarter of 2007, rising by more than 2.7 percentage points fromthe second quarter of 2007 to the third quarter of 2010. However, it is interesting
to note that the difference between the two rates is fairly stable, around vepercentage points, due to the declining share of the discouraged offsetting therise in the number of short-time workers.
This indicator is not intended as a substitute for the traditional unemploymentrate, but rather as a supplement to it, as it also measures other kinds of mismatchbetween labour supply and demand: as unemployment is not the only source ofdistress in the labour market, in order to correctly portray the overall situation,the other sources must also be taken into consideration. The indicator shows thatthe area of distress in the Italian labour market is about twice the size of ofcial
unemployment. It should also be noted that this indicator only includes peoplewho were available but unable to work throughout the period of the survey, anddoes not include those who worked less than they intended, or other types ofdistressed workers.
6. A similar rate is calculated and disseminated quarterly by the Bank of Italy in itsBollettinoEconomico. For the construction details of their rate of available unutilized labour, seeBrandolini, Cipollone and Viviano (2006).
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Figure5.Italy:Unemploym
entratebyILOdenitionandlabourunderutilizationrate
I/2
007-III/2010(Percentage
ratiosofthelabourforce;theunderutilizationratecomprises,in
additiontotheILOunemployed,
thediscouragedand
workersonzero-hourss
hort-timeworking)
Differen
ces
ILOune
mploymentrate
Labourunderutilizationrate
15.0
12.5
10.0
7.5
5.0
2.5
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Unemploymentandlabourunderutilizationrate(%)
Differences (percentage pts)
Source:AuthorscalculationsonISTATlabourforcesurveydata
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5. INACTIVITY
The fact that during periods of recession there is a fall in the number of discouraged
workers shows how ne the distinction is between discouragement and inactivity.Recessions have a strong impact on the labour supply decisions of individuals.The positioning of actors in the labour market is not a choice that is stable anddened once and for all, but the result of ows between one condition and theother of individuals who modify their choices on the basis of market conditions.Such a complex phenomenon generates relationships between aggregates that arenot always univocal. By way of example, the relationship between unemploymentand inactivity over the last few years has changed from positive to negative andvice versa a number of times.
In Figure 6 the Italian unemployment rate is plotted against the inactivity rateto show how the relationship changes over time. In the rst period, from the rstquarter 2006 to the second quarter 2007, the unemployment rate decreases whilethe inactivity rate grows, which seems to suggest a drift from unemployment toinactivity. From that point until the second quarter 2008, the unemployment rateslowly increases, while the inactivity rate decreases signicantly, reaching itsminimum level (36.9%) and suggesting the presence of an opposite outow frominactivity into unemployment. In the following period, until the third quarter 2010,the unemployment rate continues to grow but the inactivity rate also grows, bothreaching levels much higher than the starting ones. In this third case, the ows
are from employment to both unemployment and inactivity and, under the effectsof the recession, the previous negative relationship between the unemploymentrate and the inactivity rate becomes positive.
Summarizing, over the period from the rst quarter 2008 to the third quarter2010, the effects of the recession, net of labour hoarding, can be described asfollows: the increase in unemployment was 416,000 and it was accompanied byan even larger growth in inactivity (645,000), amounting to a total of 1,061,000persons affected by the recession (Figure 7).
6. THE LONG WAVE OF LABOUR UNDERUTILIZATION
We have sought to assess the impact of the recession on the Italian labour marketanalysing both unemployment and other labour underutilization phenomena such asdiscouragement and labour hoarding. Quantifying all these aspects, we can providean overview of the current situation. Compared with the pre-recession situation,the ofcial fall in employment was 607,000. However, also taking labour hoardinginto account, we estimate that at present the increase in non-utilized employedlabour amounts to some 290,000 full-time equivalents on short-time working (ofwhom 130,000 on zero hours), and 150,000 more full-time equivalents withoutany public support. As a result, the total fall in utilized employment is estimatedto be 1,050,000 full-time equivalents.
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Figure6.
Italy:Theunemploy
mentrateversustheina
ctivityrateI/2007-III/2010
(Seaso
nallyadjusteddata,percentagevalues)
Unemploymentrate
Inactivityrate
2010Q3
2007Q2
2006Q1
2008Q2
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5
36.6
36.8
37
37.2
37.4
37.6
37.8
38
Source
:AuthorscalculationsonISTA
Tdata(Labourforcesurvey)
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Figu
re7.Italy:Increasesinunemploymentandinactivitywithrespecttothe
rstquarterof2008
II/20
08III/2010(Seasonallyadjusteddata,
thousand
s)
Source:AuthorscalculationsonIST
ATdata(Labourforcesurvey)
2008Q1
2008Q2
2008Q
3
2008Q4
2009Q1
200
9Q2
2009Q3
2009Q4
2
010Q1
2010Q2
2010Q3
1200
1000
800
600
400
200 0
Increaseininactivity
Increaseinunem
ployment
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On the other hand, ofcial unemployment increased by 416,000 and inactivityby 645,000 (even though the number of discouraged workers narrowly dened fellby 170,000). Overall, the Italian labour market now has to address an increase in
joblessness broadly conceived, including the underutilization of labour, of about1,500,000 more than three times the rise in ofcial unemployment. For newentrants, this clearly reduces the chances of gaining access to employment (Table 1).
The economy has been showing signs of recovery for some time, but thereis no hint of improvement in the labour market. Why is this? In general in Italythe employment cycle lags behind the economic cycle by two or three quarters.This time lag depends on the processes by which economic activity is translatedinto employment, in a series of measures ranging from adjustments in workinghours and overtime to hiring and ring. In a downturn as severe as the present
one, it is simply unthinkable that this process can take place relatively quickly.The recovery in employment will inevitably be slow because the return togrowth requires the full utilization of labour, through the progressive reductionof labour hoarding. Businesses will not start hiring again until they have madefull use of their hoarded labour, so unemployment and inactivity will continue toincrease, as those already out of work are joined by new labour market entrants.For this reason, in the next few years the unemployment rate is likely to rise, evenif this tendency may be offset by inactivity, associated with reduced employmentopportunities, that could exert a downward pressure on ofcial unemployment.
Finally, while rms are reorganizing and, hopefully, reabsorbing underutilized
labour, for years to come the younger generations coming of age will have troublending jobs, and youth unemployment will increase. On the hypothesis that theincrease in labour utilization will begin in 2011, and the number of employedpersons grows by about 100,000 a year, it can be calculated by means of astandard stock-ow model (Di Laurea, et al., 2007) that the level of employmentof 2008 may be reached in not less than four years, and the full absorption of theunderutilization long-wave will take at least one year more.7
7. CONCLUSIONS AND POLICY SUGGESTIONS
A rst look at employment and unemployment shows that, in the Italian case, theeffect of the crisis has been fairly modest, certainly less than the drop in outputwould suggest. But a more considered judgment requires us to take account of thefact that the recession gave rise to a considerable increase in labour hoarding, insome cases subsidised by the wage guarantee fund (Cassa integrazione guadagni).In the third quarter of 2010, with respect to the rst quarter of 2008, the increase
7. In the South, however, consistent with the national growth hypothesis, the number of peoplein work is not expected to grow by more than 35,000 units a year, meaning that a return to the2008 level of employment may require not less than seven years, and full reabsorption maytake up to nine years or more.
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in labour hoarding amounted to about 290,000 full-time equivalents on short-timeworking (of whom 130,000 on zero hours), and 150,000 more full-time equivalentswithout public support. Equally signicant is the effect of the crisis on inactivity. Inthe same period the number of inactive individuals rose by 645,000, even thoughthe number of discouraged workers narrowly dened fell by 170,000.
Our quantitative exercises show that the problems of the Italian labourmarket, though apparently less critical than those of other European countries,
will necessarily persist for a number of years to come, until the economy canreabsorb both the implicit unemployment corresponding to labour hoarding andthe additional joblessness created by the 2008-2009 recession. In order to returnto the situation of the rst quarter 2008, the Italian labour market should reabsorb,in addition to 607,000 employed, 440,000 full-time equivalents currently beinghoarded, 416,000 unemployed persons and 645,000 inactive. It is undoubtedlya far more challenging task than the ofcial unemployment rate would suggest.
Even if the job haemorrhage is staunched in 2011, even in a scenario of steadygrowth it would still take at least four more years for this to be accomplished, and
in any case not without long lasting negative impacts on young people and labourmarkets in the South. As a result, the unemployment rate is destined to remainhigh for years, and possibly to rise further if employment opportunities once againraise the hopes of nding a job on the part of the inactive.
It is all the more urgent that Italy moves resolutely and without furtherdelay to a drastic overhaul that can put the economy in a position to handle thechallenges of new technologies and global competition. The recession must beused to identify a new industrial development policy aimed at making Italianrms stronger, more exible and more technologically advanced a policy thatcan remedy the structural misalignment of prices and wages between Italy and
the rest of Europe, which for so long has held back Italian growth.8 For a return
8. On this point see, among others, Tronti (2010).
Table 1. Obstacles for new entrants to the Italian labour market
Third layer Second layer First layer
EmploymentInactive: 645,000 Unemployed: 416,000 Subsidised labour
hoarding: 290,000
New entrants:500,000 each year
Unsubsidised labourhoarding: 150,000
Total: 645,000 +500,000 each year
416,000 Total: 440,000
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to growth there is no other proper adjustment variable than the elimination ofthe rents of protected rms and industries. The economy needs to enter a newgrowth path in which higher wages drive domestic demand, and export volumes
depend on quality products at competitive prices. To avoid the risk of continuingrecourse to exible labour and wages as the adjustment factors, harking back toa no longer practicable exclusively export-led model, the right course is to buildon domestic demand and wages. Unless Italy radically rethinks its developmentstrategy along these lines, it will not be able to reduce unemployment, nor escapethe trap of tight public nance and high taxation.
In addition to an effective industrial and development policy, however,economic reorganization requires a coherent system of unemployment benets,income support, workers rights and retraining for marketable skills. The two
levers are complementary, as without these programmes the protected industriescan never be opened up to competition, innovation and competitiveness. Thisstrategy implies moving the Italian labour protection system in the direction ofexinsurance, providing exible workers with at least the same social benetprotection as workers on standard contracts, if not more substantial ones (as theEuropean Employment Strategy originally envisaged).
If a few more words can be spent on this subject in concluding a paperdevoted to measuring the amplitude of the long wave of joblessness, the reformof unemployment benet programmes requires clarity in terms of the objectives,roles and nancial provisions that distinguish public action from that of the social
partners.At present, Government action is both too limited excessively selective and
arbitrary, undermining the constitutionally guaranteed universality of rights andat the same time too extensive committed to funding programmes that shouldbe mainly if not exclusively the province of bilateral collective agreementsbetween the social partners. The key principles governing the public interest, asfar as working people are concerned, are income support for those losing their
jobs, regardless of the industry or rm size (as well as income for rst-time jobseekers, especially relevant in the current and future situation) and programmes
for enhancing human capital. The public interest in rms, on the other hand, isto promote competitiveness and exibility in production and employment, inorder to permit continuous adaptation to global competition. From these simpleprinciples it follows that Governments needs to fund unemployment benets anda minimum income, as well as providing employment services and broad policiesfor employability aimed both at the employed and at unemployed workers.
The social partners have competing aims and objectives. Firms have aninterest in retaining skilled workers through the ups and downs of the businesscycle and avoiding the opposition of unions to downsizing, job mobility and in-novation. Workers have different interests, in particular keeping jobs and incomesduring economic downturns. For this reason instruments such as labour hoarding,mobility programmes and outplacement should be the product of management-labour bargaining and should be funded by joint insurance schemes. Government
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intervention in this sphere should be limited and always secondary, in supportof the primary role of collective agreements. It should also be limited over time,never losing sight of the general objective of competitiveness and the exibility
needed for the economy to respond quickly to the ever changing conditions ofcompetitive markets.
The reform of Italys labour market policies thus requires a correspondingenhancement of training policies for employable skills, to be run in conjunctionwith income support programmes, making explicit the terms of the trade-off.This means government intervention in return for a commitment on the partof workers and employers to contribute, through effort and investment, to thecountrys progress. Improved services to boost employment and employability,along the lines of the European exicurity model, are a necessary but not sufcient
condition for reorganizing the economy, committing businesses in all industriesto re-engineer the workplace to make for a leaner, more innovative and exiblelearning economy. A more rational and efcient system of unemployment benetsneeds to be accompanied by a bold new industrial development policy designedto foster economic growth. These are merely two sides of the same coin, and willprove successful only if implemented together.
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